When the first Skylanders figure propelled itself into consoles in 2011, a new chapter in interactive toy gaming was born. Disney’s decision this week to shutter its Infinity business tells a different story for the genre and for the House of Mouse itself, which is halting its self-published video game operations to focus exclusively on third-party licensed titles.

The closure of Disney Infinity-branded games and Avalanche Software, the 300-person Utah-based studio that’s been producing the titles since 2013, will result in a US$147-million write down against Disney’s second quarter earnings. The company’s Q2 financial results offer a window into its decision to stop producing Infinity, which has been seeing lagging sales and high development costs for some time. For the period ended April 2, Disney’s Consumer Products & Interactive Media segment saw a 2% dip in revenues to US$1.19 billion, where low Infinity revenues were offset by higher licensing revenues. (The House of Mouse reported overall earnings of US$2.1 billion for the quarter, marking an increase of US$35 million over last year.)

Disney made headlines in March with its decision to not release a fourth installment of Infinity in 2016, and consumer disappointment intensified when Disney Infinity 3.0 stopped making Apple TV updates a month later. According to a blog post by Disney Infinity SVP & GM John Balckburn, fans of the console game can get their hands on two final retail releases by next month, which will include three new characters from Alice Through the Looking Glass and the Finding Dory Play Set.

It wasn’t always this way. The Infinity series launched in 2013 to much fanfare─and its fair share of competition, thanks to Activision’s trailblazing Skylanders franchise. The original Infinity game brought classic Disney and Pixar characters to life through connected physical figures, and it was followed by Disney Infinity 2.0 in 2014, which took advantage of the company’s Marvel acquisition with the release of Spider-Man and Avengers titles and accompanying accessories.

The 2015 launch of Disney Infinity 3.0 was designed to bring The Force to the console game with a series of Star Wars-branded characters, which made their debut last fall on PlayStation4, PlayStation3, Xbox One, Xbox 360, Wii U and PCs, as well as versions for iOS and Android devices. In terms of the broader interactive toy gaming sector, Disney Infinity 3.0 was far from a sales disappointment. It helped the overall US$4-billion toys-to-life category─also comprised of Skylanders, Nintendo Amiibo and Lego Dimensions─generate US$720.5 million in the US last year in combined software and accessory sales, according to The NPD Group. (Under the hood, software sales were down 4%  last year, but were offset by 13% growth in accessory sales, which include the actual physical toy figures.)

“The numbers show that there is strong and activity and good health for the interactive toy gaming category,”  says NPD Group games industry analyst Liam Callahan. “Disney had already announced that they weren’t releasing Infinity 4.0, so we estimated this year would be down in sales, since there was no incoming software update. But Disney Infinity’s closure means there are implications beyond 2016 now, and there is clearly going to be a gap in the market.”

The question is, can that vacancy be filled? For starters, a Skylanders animated TV series is set to launch this year, which will serve to breathe new life into the brand. Callahan also believes that Lego Dimensions had a solid launch in 2015 and is in a strong position to capture Disney fans.

“While there will be a momentary setback that comes with major player exiting the market, I think the phenomenon and play pattern of kids using physical objects to interact with digital world is still viable,” Callahan says. “There is lots of money coming in from consumers with high satisfaction levels. There are still potentially long-term opportunities.”

According to NPD’s summer 2015 Interactive Gaming Toys report, 70% of US parents are familiar with interactive gaming toys, with 40% owning items from at least one of the three main franchises (Skylanders, Disney Infinity and Nintendo Amiibo).

Still, Callahan says that two things need to be considered in order for the interactive gaming toy category to truly thrive. The first involves expanding beyond the core demographic of eight- to 12-year-old boys, whether that involves targeting older, younger and more female fans. The other centers on game play innovation. Toys-to-life games have long focused on the same mechanics that involve action titles, and Callahan believes there are opportunities to innovate and involve more role-playing games that move beyond singular character missions.

When asked why Disney─a true machine in character creation and development─had failed to strike gold in the original video game space, Callahan had few explanations to offer, other than pointing out that there has been a disconnect between Disney’s toy-selling prowess and its console gaming revenues. Aware of this chasm, Disney merged its consumer products and interactive business units last June in an effort to better meet changing consumer preferences in a technology-driven marketplace. Nine months later, its division co-chair Leslie Ferraro departed, leaving former Disney Interactive president James Pitaro to lead the division as chairman. For fiscal 2015, Disney’s Interactive division saw growth driven by the ongoing success of its Tsum Tsum mobile game, which was offset by lower operating income from Disney Infinity.